Analysis: Downplaying China's wage increase impact

Friday, September 21, 2012

The two hottest buttons when it comes to trade with China both have to do with cold hard cash: currency valuation and wage increases.
The first seems to be forever on the backburner of American politics, brought to the forefront during political elections, only to retreat to the back again in odd-numbered years.
The second has been an issue in recent years as China’s working class gradually ascends to the middle class.
But on Thursday, a delegation from the American Chamber of Commerce in Shanghai said neither issue is a big deal to American companies looking for success in China.
The currency issue is largely a non-starter, dredged up by political candidates who want to make hay with prospective voters.
“There’s campaign rhetoric, and then there’s reality,” Ken Jarrett, chairman of AmCham Shanghai, said at a luncheon in Washington hosted by the National Foreign Trade Council.
The reality is China’s currency has appreciated 30 percent against the dollar since 2005, and the candidates in recent years, once elected, tend to drop the subject and focus on other, more pressing issues.
The wage issue in China has a little more teeth to it. Average wages in China grew 12 percent in 2011, something that has been promoted by the government. But wage growth isn’t uniform across a huge geographical area, with regional areas at different stages of maturity.
More importantly, whether the wage increases impact your decision about moving production out of China likely depends significantly on what your strategic aims are in the first place.
“Most American companies (in China) are there for that market, so it’s not impacting them,” said Jay Hoening, chief operating officer of Hill & Associates in Shanghai, which advises companies on risk management and business intelligence arenas.
Indeed, companies looking to sell to China’s growing middle class – which AmCham said accounts for the vast majority of American companies in China – are not deterred by rising wages. For one, it would make little sense to produce outside of China in order to sell to Chinese consumers. And second, rising wages translate to rising consumption power, validating their presence in China in the first place.
“If you’re talking about China as a factory to the world, wage increases are a factor,” said Ted Dean, chairman of Beijing-based AmCham China. “But if you’re an American company looking at the second biggest economy in the world, it’s not a factor.”
One shipper in the delegation said the wage increase issue – as well a perceived talent shortage in some areas – affects companies differently.
“It also depends on the employees you’re trying to hire and where you’re trying to hire them,” said Peter Sykes, president of Dow Greater China. “Our employment base in China is 99 percent local, and the quality of talent has been beyond our expectations. We’re not aiming at the low-cost model. We’re going after the best talent and we get it.”
As wage levels climb, China’s growth is decelerating however. The country had GDP growth of 7.6 percent in the second quarter, which would be great for most countries.
“In China terms, that’s slow growth, but that’s where the leadership wants to be,” said Jarrett, adding the government has been trying to slow down growth below double digits because that growth is unsustainable.
“We tend to use growth numbers about the Chinese economy, but it’s actually a collection of regional economies,” Sykes said. “Where you are geographically can have a big effect on your growth rate. Western China is seeing double the average GDP growth. We’re looking to diversify our presence in China to take advantage of high-growth markets while maintaining our presence in the mature regions.”
Sykes said China is now Dow’s second biggest international market after Germany.
While the United States gears up for its presidential election in November, China is also set for a transition at the top. Jarrett said he sees little to suggest that looming transition within China’s Communist Party will have much effect on policy.
“These are people who have had senior positions in the government,” he said. “China policy is largely consensus-driven. They like incremental change.”
Jarrett said while AmCham was hopeful the Chinese government would tackle reform of its financial markets to a greater degree, the reality is that it has been primarily focused on dealing with the global economic downturn.
He said the country is wrestling with issues like the role of state-owned enterprises, and whether more open markets and more private sector involvement would be beneficial.
When asked how China’s business climate has been during the Obama administration, Jarrett said it has been challenging.
“That’s not just for U.S. businesses, but all foreign businesses,” he said.
Jarrett chalked up the difficulties more to China’s recovery from the global recession in 2009 than to anything the Obama administration has done. He said foreign companies now face competition not just from each other, but also from rising Chinese companies, which he dubbed “national champions” among various industries.
AmCham is in Washington for its annual “door knock” with government officials this week. One of the initiatives it is pushing is expansion of exports from U.S. small and medium enterprises (SMEs), something that would seem to dovetail well with the current administration’s National Export Initiative.
But SMEs have largely been untapped in terms of exports, AmCham asserts.
“Only 1 percent of U.S. SMEs export anywhere,” Jarrett said. “And only 10 percent of that 1 percent exports to China.”
By AmCham Shanghai’s projections, doubling that percentage could translate to as much as $400 billion in trade additional trade. With an estimated 5,000 U.S. jobs tied to every $1 billion in trade, the impacts could be huge, the delegation said.
U.S. exports to China surpassed $100 billion in 2011 for the first time, yet that growth has come without much reliance on SMEs, which Jarrett said is the backbone of the U.S. economy.
AmCham has developed an SME center to assist small companies looking to export to China, but unsure where to begin.
“You need to have a commitment to a presence in China,” said Tom Ward, president of PIM Ltd., a Shanghai-based research and advisory firm that assists industrial and manufacturing companies enter China.
“You could have a consulting firm act as a bridge for a certain period of time and then transition those employees to your company once you have an established presence. There are many avenues to access China.”
Sykes said the United States had a 10 percent share of Chinese imports 10 years ago, but that has now dropped to 7.6 percent.
“There has been a relative loss of share, so we see big opportunities," he said. “There will be 400 million people in the middle class in China by 2015, and young people are conspicuous consumers." - Eric Johnson